A bank will most commonly find its security rights tested when a customer fails to pay or otherwise defaults and the bank demands delivery of cargo. It may find that the cargo has already been discharged without production of the bills and therefore seek to exercise its remedies against the carrier. However, even where the bank holds the original set of bills, its claim for misdelivery may not necessarily succeed, reports Watson Farley & Williams.
Bills of lading
Banks may come into possession of bills of lading in several circumstances. In connection with a letter of credit, a bank will check that the documents are compliant. A bank financing the purchase of goods may wish to hold the bills to give it possessory security over the goods pending payment by the customer. The bank may agree to release the bill under a trust receipt to its customer to enable the latter to obtain delivery of the goods but hold those goods to its order pending payment of the advance to the bank.
Banks may be content simply to have possession of the bills of lading without obtaining title to the goods, in which case the bank may not be named as either the consignee or order party in the bills or simply hold the bills endorsed in blank. However, for the bill to be validly transferred to the bank, it must not only have the bill but have also unconditionally accepted it (see section 5(2) UK Carriage of Goods by Sea Act 1992 “COGSA”).
Rights under bills of lading
There have been several recent decisions which cast doubt on the ability of banks to make claims under the bills which they had accepted as security for the financing of the purchase of cargo (such as STI Orchard (2022) SGHCR 6, Standard Chartered Bank (Singapore) Ltd v Maersk Tankers Singapore Pte Ltd (2022) SGHC 242 and UniCredit Bank AG v Euronav NV  EWCA Civ 47). A bank is rarely named as a shipper in the bill, but in any event, this may not strengthen the bank’s position. A shipper will lose its right of suit in contract against the carrier when the bill has been endorsed and transferred such that the transferee becomes the lawful holder of the bill of lading (although it may still have a claim in bailment; East-West Corporation v DKBS 1912 (2003) 1 LLR 239).
A transferee is a person to whom the bill of lading has been physically transferred or delivered and endorsed (either the bill may be endorsed in blank or the consignee made out ‘to order’).
S.5(2) of COGSA (or Singapore Bills of Lading Act (“BLA”)) provides that a person shall be regarded for that act as having become the lawful holder of a bill ‘…wherever he has become the holder of the bill in good faith…’. The concept of good faith is not stipulated in the COGSA or the BLA, but it is understood and equated with honest conduct (Aegean Sea (1998) 2 LLR 39). Rights of suit can be obtained if:
(a) it is the consignee of a bill without the need for a shipper to endorse the bill to the consignee (and this would include a consignee whose interest was that of a pledgee; see The Berge Sisar (2002) 2 AC 205);
(b) in the case of an endorsee, when the bill is delivered to it and the endorsee accepts the bill; and
(c) a person possesses a bill where it would have become a holder under either (1) or (2) above but for the fact that it became so after delivery provided that the transfer took place in reliance upon a prior existing contractual arrangement.
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Source: Watson Farley & Williams